Mortgages

Are Fixed or Variable Rate Mortgages the Best?

There are two main types of mortgage interest and they are fixed and variable. Some people prefer one and others the other and so it can be a bit confusing knowing which to choose. It is important to have a good understanding of what the difference is between them and they you will be able to judge which you feel will suit you the best.

Fixed Rates

A fixed rate simply means that the interest rate that you pay on the mortgage will be fixed for a certain amount of time. Therefore, it will be set at a certain rate and it will be guaranteed not to change. This could be for a year, several years or more, but normally it is only up to five years. The time frame will depend on the particular lender that you choose. The rate will often be a bit higher than the variable rate and so it is worth noting that there is a chance that it could be more expensive. However, it is possible that variable rates could go up and then you will save money, so it can be difficult to predict. All we know for sure is that the lender will put the rate at a level where they think they will make a decent profit without being uncompetitive. It is also worth noting that with fixed rates you often have a contract and have to stay with tat ender through that fixed rate period. This means that if you see more attractive rates elsewhere you will not be able to change lenders and this could mean you will end up paying a lot more than necessary. You might be able to switch but pay a high fee and this will vary between the different lenders so is worth checking before you sign up.

Variable Rates

With a variable rate mortgage, the rate of interest that you pay can change at any time. This means that you will find that you will take a risk if you choose a variable rate as it could go up at any time. Although lenders do tend to try to remain competitive, they will also change rates from time to time. Of course, there is a chance that the rates might go down, bit it often seems to be the case that they are more likely to go up. However, if the Bank of England reduces the base rates, there is pressure on the lenders to reduce their variable rates and if the rates go up it is very likely that they will put their rates up. They can change their rates at any time and they therefore may not wait for the base rates to change before they change theirs.

There are pros and cons to using both of these types and it is a good idea to think them through to see which might be the best for you. It is normally the case that if you can only just afford the mortgage repayments, then it is a good idea to go for a fixed rate because you will be guaranteed that it will not go up and therefore you will not struggle to repay it but it could mean you will be tied in to that rate for a long time. However, if you are happy with taking that risk then the variable rate could be better because there is chance that it could go down as well as up. If you predict rates will fall, then this will be even better as you will hope that you will end up paying even less interest than you will when you take out the loan.

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